HFN Industry Overview: April 2011

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On May 31, 2011 with 4,117 hedge fund products reporting, the HFN Hedge Fund Aggregate Index was +1.42% in April and +2.79% YTD 2011 while the S&P 500 Total Return Index (S&P) was +2.96% during the month and +9.06% YTD.

Hedge Fund Industry April Highlights:

�Total industry assets rose an estimated 2.26% to $2.607 trillion in April. Performance accounted for the majority of the asset increase and net investor allocations were positive for the tenth consecutive month.
�A falling U.S. dollar and rising energy and precious metals prices resulted in strong performance from foreign exchange and natural resource strategies in April.
�Healthcare funds produced the best equity market sector focused performance in April followed by technology funds. Despite rising energy prices, energy equity sector fund returns were below average.
�Japan focused funds were again negative during the month, the Japan Index was -0.74% in April and -0.66% YTD.

CTA/managed futures and global macro strategies were the primary beneficiaries of the U.S. dollar's sharp decline to other major currencies along with the rise in gold and nearly 30% spike in silver prices. Conversely, falling yields on the U.S. 10 YR note hurt several funds focusing on government bond related strategies. The group was -0.02% in April even with some strong returns from funds focused on EM sovereign credits.

HFN developed the Outlier ratio to determine which sectors are producing high or low returns outside of their normal ranges. Surprisingly, in April, mortgage focused funds had the lowest average ratio despite the HFN Mortgage Index rising +1.49%. Healthcare, CTA, macro, technology and merger arbitrage funds all had above average ratios in April. Convertible and credit arbitrage, along with mortgage strategies all had low figures.

HFN Regional Benchmarks

Emerging market strategies again outperformed developed market focused funds in April, led by those investing in Brazil and China which returned an average of +2.34% and +2.13%, respectively. Russia focused funds fell during the month, -1.54%, but are still the best performing regional classification in 2011, +4.38%.

Japan funds continued to struggle in the aftermath of March's natural disaster falling -0.74% in April, while the Nikkei rebounded +0.97%. Japan funds have lost an average of -5.30% in the last two months, pushing the HFN Japan Index into negative territory for 2011. April was a rare instance for Japan funds to be negative on average when the Nikkei rises. In the last five years this happened only three other times. In each prior occasion the Nikkei was bouncing off of a large loss.

Monthly Asset Flow Estimates

�Total estimated hedge fund assets at the end of April 2011 were $2.607 trillion, an increase of 2.26%, or $57.6 billion from March.
�Performance accounted for an increase of $41.2 billion and investors accounted for a net inflow of $16.5 billion.
�The core rate of growth (% asset change due to investor allocations/redemptions) was 0.65%, an increase from March and above the last twelve month average.
�Total hedge fund AUM is now 13% below the all-time high set in Q2 2008.

Net investor flow information continues to indicate strong interest for investing directly into hedge funds. April inflows showed the tenth straight month of net allocations and the core rate of growth was the second largest in 2011. The average rate of growth over the last twelve months is 0.40%

Sub-Sector Specific Flows

�Japan fund investor flow data has been mixed, but the majority of data reported to HFN indicate more funds had net investor inflows in April than outflows.
�Commodity, credit arbitrage and macro strategies had the highest rate of allocations in April. Emerging markets, market neutral equity and multi-strategy fund data indicated net redemptions.
�Managers located in developed Europe had the highest rate of allocations in April followed by Asia, then North America.
�Funds with Europe as an investment region also had positive investor flows in April while those focused on Latin America and emerging Europe had net outflows.
Performance Review
Fixed Income (FI) Strategies
�The average return of all fixed income focused strategies was +0.93% in April and +3.30% year-to-date.
�Distressed credit funds performed best in April, +1.77%, and mortgage funds continued to post positive returns, +1.39%.
�Fixed income fund assets rose 1.84% in April to an estimated $684.8 billion. Investors added net $5.7 billion during the month.

Equity (EQ) Strategies

�The average return of all equity focused strategies was +1.11% in April and +2.60% YTD.
�Funds investing in healthcare sector equities had the best returns, +4.60%, followed by those investing in technology stocks, +1.61%. Finance sector funds lagged, but were positive, +0.66%
�Equity fund assets rose an estimated 2.72% to $858.6 billion in April. Investors allocated a net $8.4 billion during the month; a sharp increase from March.

Commodity and Foreign Exchange (FX) Related Strategies

�Broad natural resource commodity strategies were +3.08% in April and +3.56% YTD.
�Funds investing in FX markets had their best month in more than four years, +2.67%, and are +1.61% YTD
�Funds focused on metals markets performed well, +2.82%, as did energy commodity funds (not energy EQ sector), +2.24%. Agri-focused funds lagged, +0.18%, with relatively volatile returns across fund performance.

Summary Analysis

Investor interest in April continued to be above 2010 rates, which has been the case in each of the first four months of 2011, evidence that large investors continue to increase allocations to the industry despite performance lagging equity markets. With May coming to a close and equity markets broadly lower, it appears that for at least one month this year the industry will outperform. Long/short equity strategies have lagged the S&P by a monthly average of 156 basis points this year, an indication of widespread defensiveness. This will likely be to the benefit of several strategies in May, but the reversal of the April trend of a falling U.S. dollar will likely result in losses in macro and CTA strategies.